Lloyds Banking Group will no longer accept cash savings, including Isas, to fund the repayment of an interest-only mortgage. Photograph: Bloomberg

The UK's major high street lenders have made it almost impossible for thousands of homeowners on interest-only mortgages to move home. The new, stricter rules on lending criteria, also mean very few new borrowers will qualify for an interest-only product.

Lloyds Banking Group will no longer accept cash savings, including Isas, as an acceptable way to fund the repayment of an interest-only mortgage. Instead, Lloyds – which includes Lloyds TSB, Bank of Scotland, Halifax and Cheltenham & Gloucester – views investment products such as endowments and equity Isas as better longer term vehicles with which to settle an interest-only mortgage.

A spokeswoman for Lloyds said this was because the bank considers cash savings to be "fluid and for the short-term whereas the investment vehicles we accept are better suited to longer-term planning". She said even a huge cash pot would not be deemed an acceptable repayment vehicle.

Borrowers must have at least £50,000 in one of the acceptable investment vehicles and can only borrow up to 80% of the total value of that investment. So if you have £200,000 invested in an approved product, you will only be able to borrow a maximum of £160,000. The rules apply to new customers and existing homeowners who want to move or remortgage.

Ray Boulger of mortgage broker John Charcol says: "The borrowers likely to be most disadvantaged by these new rules are those with an existing interest-only mortgage who want to move or remortgage, particularly older borrowers in their 50s or even 60s.

"Many who have perfectly sensible repayment strategies will find they can't meet the new criteria and the nearer they are to their planned retirement age, the more unlikely they will be able to afford to switch to a repayment mortgage, or indeed be able to meet the lender's affordability requirements for a relatively short-term mortgage.

"If a borrower wants to lock into a fixed rate for protection from the risk of interest rate rises they may not be able to. How is any of this meeting the Financial Services Authority's requirement for lenders to treat customers fairly?"

Santander has already introduced rules that new interest-only borrowers must have at least a 50% deposit or at least 50% equity in their homes, which means that someone buying a home worth £200,000 would qualify for only a £100,000 mortgage. Barclays also now requires borrowers to use only approved investment vehicles such as endowments, mutual funds or equities.

Meanwhile, Royal Bank of Scotland said it will not allow first-time buyers to take out an interest-only mortgage, and loans of this type require a deposit of at least 25%.

The changes have come about as the FSA undertakes its Mortgage Market Review (MMR), part of which investigates how lenders keep track of borrowers' repayment vehicles. The FSA initially said the MMR would include a requirement for lenders to make annual checks on their customers' repayment products, but the watchdog has since relaxed this to a single check during the lifetime of the loan. Some lenders now believe they could be sued if repayment vehicles fail to generate enough capital to repay the mortgage, as happened in the last decade with endowments.

Endowment mortgages, popular in the 1980s and early 1990s, fell out of favour when it emerged that projected growth rates for the product of 7-12% a year had been wildly optimistic and 4% was more realistic – leading to thousands of homeowners facing shortfalls in their mortgage. As a result the regulator had to send out projection letters (colour-coded red, yellow or green) to all endowment policyholders informing them whether they were on track to repay all or part of their mortgage.

Billions has been paid in compensation by insurance companies or independent financial advisers who recommended borrowers take out an endowment, and FSA figures show that of the 150,000 borrowers with interest-only mortgages due to mature each year between 2011 and 2020, 60,000 will have to extend the term due to a shortfall – 42,000 of whom will be in their sixties.

Mark Harris, chief executive of mortgage broker SPF Private Clients, says: "These moves by Santander and Lloyds are hugely disappointing but no surprise. It's like a pack of cards: once one lender tightens its interest-only policy, then the others will inevitably follow. Subsequently, it is becoming increasingly difficult to borrow on an interest-only basis, which means less flexibility - particularly for the more sophisticated borrower who simply does not want a repayment mortgage.

"Interest-only borrowing is not necessarily reckless, as long as the borrower has a sensible and achievable repayment strategy in place. Reducing the repayment vehicles that are deemed acceptable or limiting loan sizes or LTV bands is a rather blunt instrument. It should be decided on an individual case-by-case basis, but lenders on this scale may not be able to operate in this way."